Radius Recycling Inc (RDUS) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the Schnitzer second-quarter 2011 earnings release conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator instructions).

As a reminder, this conference is being recorded. Now I will turn the program over to Alexandra Deignan. Please go ahead.

Good afternoon. I'm Alexandra Deignan, the Company's Investor Relations contact. I would like to thank everyone for taking the time to join us today. In addition to today's audio comments, we have prepared a set of slides which were made available concurrently with our earnings press release. You can access the slides through our website at www.SchnitzerSteel.com or at CHN.com.

Before we get started, let me call your attention to the detailed Safe Harbor statements on slide two, which are also included in our press release of today and in the Company's Form 10-Q for the second quarter, ended February 28, 2011, which will be filed this afternoon.

These statements, in summary, say that in spite of management's good faith current opinions on various forward-looking matters, circumstances can change, and not everything we think will happen, always happens.

In addition, we have guidance regarding our outlook for the third quarter of 2011 in our press release, in this presentation and in our 10-Q, which will be filed later today. After this call we will not be under any obligation to update our outlook.

Finally, please note that we will be discussing some non-GAAP measures during our presentation today. We have included a reconciliation of those metrics to GAAP in the appendix of our slide presentation.

Now let me turn the call over to Tamara Lundgren, our Chief Executive Officer. She will host the call today, with Richard Peach, our Chief Financial Officer.

Good afternoon, everyone. We're pleased to report our second-quarter earnings for fiscal 2011. It was a quarter in which we delivered very strong results. We expanded our operating margins while, at the same time, making significant strides on our acquisition strategy, which both strengthens our raw material supply line and enlarges our geographic platform.

This afternoon I will start us off with a review of our consolidated results and the highlights from each of our businesses. Then Richard will discuss the detailed results for our segments and review our cash flow and capital structure. I will conclude with an outlook for our third quarter, and then we will open up the call for questions.

So let's get started by turning to slide 4. We achieved our strongest second-quarter operating results since fiscal 2008, with each of our segments delivering improved financial performance. At the same time, we continued to execute on our growth strategies through acquisitions and CapEx investments focused on improving our operating efficiency and production yields.

Year-over-year, our revenues grew by 28%, our operating income grew by 61% and our earnings per share grew by 77%. So far in fiscal 2011 we have announced a six acquisitions in our Metals Recycling Business and three acquisitions in our Auto Parts Business. This reflects two more, in total, than what we announced on our last quarterly earnings call.

Our strong cash flow from operations and a healthy balance sheet give us the flexibility to continue to seek out acquisitions that generate attractive margins and significant synergies.

So let's turn to slide 5 for a closer look at our consolidated results. Market demand for recycled metals continues to be strong and broad-based. In MRB, when we look at our ferrous sales volumes for the most recent four quarters, aggregate volumes continue to approximate the record volumes achieved in fiscal 2008, while nonferrous sales volumes over the last four quarters are trending on a record run rate.

Average sales prices over the last four quarters are also trending higher. And so, as a result, year-over-year our ferrous revenues grew by 26% and our nonferrous revenues grew by 49%.

During the second quarter we continued to capitalize on our ability to access demand in the export markets, shipping our ferrous and nonferrous products to 19 different countries during Q2. Our largest export ferrous buyers this year, or this quarter, were China, Egypt and South Korea. And on the nonferrous side our largest export destination this quarter was China.

On the domestic front, domestic demand gained strength, largely driven by strong manufacturing production in the automotive sector and continued low inventory levels which required restocking.

Turning to APB, we again delivered high operating margins and maintained strong car purchase volumes. The higher sales and nonferrous prices benefited our scrapping core sales, and offset the seasonal decline in parts sales and emissions.

During the second quarter we also made $180 million of investments including $159 million for acquisitions and $21 million for CapEx. The CapEx is primarily related to growth projects for our nonferrous technology upgrades.

Our strong performance is a clear indication of our ability to maximize operating efficiencies, while simultaneously investing in growth opportunities that enhance value. Our business platform is uniquely scalable, and the success of our focus on operational excellence and strategic execution is evident in our financial results.

So let's turn to slide six, and we will take a deeper look at our Metals Recycling Business. The growth in MRB's total revenues of about 30% is only part of a really strong performance. The other part is that MRB delivered a 6.5% operating margin. The strong performance is a reflection of our focus on continuous improvement, the positive impact of our investments, and our ability to capitalize on broad-based demand globally.

Since most of our acquisition closed during the latter half of the second quarter, their impact on revenues and operating income was not material in the quarter.

Scrap flows during the quarter were stronger than normal, as higher prices offset the impact of the tough winter weather throughout the country. The net result of higher prices, stronger scrap flows and the positive impact from our operating efficiencies was significantly higher operating income per ferrous ton, $38 this quarter versus $21 in the first quarter of 2011.

We talked about our CapEx spending on the last slide, so let me give you a quick update on our nonferrous technology upgrades. As I mentioned on the last call, Portland's upgrade became operational in the middle of the first quarter, and contributed to our second-quarter results. Tacoma and Everett came online during the second quarter, and our Oakland installation began initial testing last week. We expect that for the balance of this year all four installations will be fully operational and will contribute to our second-half results.

So let's turn now to slide seven for a review of the Auto Parts Business. Our Auto Parts Business continued to generate higher revenues and operating income and margins above 20%. Revenues grew 32%, driven by higher commodity prices on scrap and core sales. Our operating income grew by 24%, and we increased car purchase volumes by 16%.

In addition, we continued to build scale by making acquisitions in Washington, Texas and California. And in particular, our Washington acquisition of three facilities provides a new franchise opportunity in the Pacific Northwest, near our Tacoma Metals Recycling operations.

So now let's turn to slide eight for a review of our Steel Manufacturing Business. Rising scrap prices resulted in higher average sales prices during the second quarter, driving a 26% increase in revenues for our Steel Manufacturing Business on essentially what was flat volume.

The ability to pass through these higher raw material costs, combined with our product diversification and our focus on operating efficiencies, enabled us to achieve near breakeven profitability despite a 52% utilization level.

Let's take a look at slide 9, where I would like to take a moment to step back and recognize how significantly we have grown our Company over the past five years.

You know sometimes, as we delve deep into the variances and nuances in the quarterly earnings, the bigger picture can get lost. And yet it is essential to understanding our growth strategy and our ability to achieve enhanced value over the long term.

In 2005 we were a West Coast Metals Recycling Business with three deepwater ports, one steel mill and 30 auto parts stores located primarily in Northern California. Since 2005 we have invested nearly $1 billion in acquisitions and CapEx projects to upgrade our infrastructure and to incorporate advanced technologies.

In Metals Recycling we have significantly improved our operating efficiencies and expanded our geographic footprint. In auto parts we have honed our self-service branded retail strategy and scaled our highly productive self-service model throughout the country. And at our steel mill we significantly upgraded our facility, which has enabled us to more efficiently produce a diversified line of product.

So now, if we take a look at slide 10, we can see where we are in 2011. On our 2011 map you can see the substantial and focused expansion we have achieved. The green dots represent our MRB facilities, which are primarily located on both coasts of the US to provide efficient port access. Our deepwater ports, now numbering seven, enable us to supply the export markets more efficiently. And we have water access at another five facilities that enable us to efficiently transport materials for processing and for export or domestic consumption.

The vast number of blue dots illustrates the scale of our growing Auto Parts Business, which continues to generate strong margins, and is a significant contributor to our overall financial results.

While our acquisition activity may vary in any given year, over the past 5, 5.5 years we have consistently grown our operations with a strategic emphasis on efficient access to coastal ports and a disciplined approach to valuation. Today we can credit the development of a core competency in acquisitions and our successful CapEx investments with our accelerating profitable growth.

And we can see the results of that in financial terms if we turn to slide 11. Slide 11 captures our accelerating performance, and it shows our ability to successfully navigate through the toughest economic conditions. While we weathered the global financial crisis which impacted our fiscal 2009 results, our business model enabled us to generate strong cash flows as we drew down inventories and reduced working capital.

So when we say that in strong and weak markets we not only survive, we find ways to thrive, you can see from this slide that we have the ability to adjust to ever-changing markets by maintaining and even improving our financial strength.

As you can see in the green bars that reflect our financial performance over the last four quarters, we have delivered strong improvements in both revenues and earnings. The recent run up in prices obviously impacts levels of working capital and consequently operating cash flows, but it is positively offset by the improved profitability. The net result is strong earnings growth in accelerating markets and increased cash flows in decelerating markets.

So now let me turn it over to Richard, who will highlight market trends in our segment performance, and provide an update on our capital structure.

Good afternoon to everyone on the call. I will start my presentation on slide 12. As shown on the left, the average ferrous sales price in the second quarter was $419. This was a significant increase of 41% from the second quarter of the prior fiscal year.

The upwards trend in pricing has been driven by stronger demand. And in the current fiscal year average second-quarter prices were higher by 19% from the average of $353 in the first quarter. This upwards trend flowed through to our bottom line results.

The second quarter benefited from ferrous shipments which had been contracted at higher prices when the forward market moved up late in the first quarter, and which then continued to increase all the way through to the middle of the second quarter.

As shown on the right, ferrous sales volumes in the second quarter were 1.1 million tons. Of this amount, exports represented 78%, which demonstrates our ability to satisfy the strong overseas demand.

Due mainly to the timing of export shipments, second-quarter sales volumes were 11% below the first-quarter record. In particular, a couple of bulk shipments moved into the third quarter, which is normal course of business. However, the overall trend in volumes is up, with total ferrous sales for the first half of this fiscal year being higher by over 20% compared to the first half of fiscal 2010.

Turning to slide 13, I will discuss nonferrous. As the left chart shows, second-quarter average nonferrous prices were $1.04. This represented a significant uplift of 30% compared to the second quarter of the prior year. Drivers, which included the continuing recovery in consumer demand, also led to a sequential increase of 10% compared to the first quarter of the current fiscal year.

As shown on the right, second-quarter sales volumes were 121 million pounds. This represented a sequential increase of 9%, and the second quarter was also up by 16% compared to the prior year. Our nonferrous sales volumes benefited from higher levels of production as we continue to implement upgrades to our nonferrous sorting equipment. In addition, the second quarter included initial contributions from the new acquisitions that we recently completed.

As in the first quarter, the underlying trend in nonferrous sales volumes is increasing, both organically and through acquisitions, and the first-half run rate is higher than what we achieved in our last fiscal year.

Turning to slide 14, I will summarize how the topline performance translated into MRB's second-quarter financial results. As the left graph shows, MRB second-quarter operating income was $42 million. This continues the upwards trend in annual and sequential second-quarter performance.

Operating income per ferrous ton is graph on the right and shows that we achieved $38 in the second quarter. Notwithstanding a net benefit from a customer contract settlement, our per-ton operating income was still significantly in excess of the first quarter and is our second-best quarter in Metals Recycling since the start of fiscal 2009.

The improvement in operating profitability reflects the strong demand. And as the US economy shows some signs of improvement, our operating margins have also benefited from the gradually increasing availability of raw materials. It was notable for the second quarter that with scrap rices at high levels, supply (inaudible) were strong, even over the winter months.

These [sent] strong second-quarter results were achieved without a significant contribution to operating income from the new acquisitions. However, we expect to see benefits begin to come through in future quarters as we work through post-acquisition integration and as we ramp up operations of the completed upgrades to nonferrous technology.

Moving on to slide 15, we will come to our Auto Parts Business. Auto Parts continues to generate strong growth, coupled with excellent operating profitability and increased car purchase volumes.

As shown on the right, second-quarter car purchase volumes of 81,000 cars was 16% higher than the same quarter in the prior year. The majority of the increase was generated from operating improvements in marketing, and also in car procurement. But notably, around one-third of the increase came from new stores, including partial quarter benefits from our new acquisitions in the Pacific Northwest and also in Texas.

Turning to slide 16, this shows how operational improvements flowed through to APB's recorded performance. Compared to the second quarter of the prior year, APB grew revenues by 32%. This was primarily driven by the combination of increased car purchase volumes and benefits of higher commodity prices on sales of scrap and [cars]. Second-quarter operating income of $16 million was 14% better than the first-quarter record, and included strong operating margins of 22%.

Now changing business, if you will come to slide 17, I will summarize the performance of our Steel Manufacturing Business. As expected, the amount of the steel mills' products remained soft. And our second-quarter sales volume of 99,000 tons, as shown on the right, was flat sequentially and with the prior year. However, moving to the left-hand graph that shows we were able to pass through rising scrap costs, achieving average prices of $687 per ton. That equated a 24% improvement year-over-year and a sequential increase of 8%.

Now turning to slide 18, we will look at SMB's financials. Compared to the prior year, SMB's revenues increased 26% to $70 million. This has enabled us to achieve close to breakeven performance despite utilization rates of 52%. The results reflect the week West Coast construction market. And we are continuing to exert strong discipline over operating costs, inventory management and onging levels of capital expenditure.

And now turning to the balance sheet on slide 19, this shows our investment activity on a consolidated basis. During the first half of fiscal 2011 we spent $166 million on completed acquisitions. We also spent $46 million on capital expenditures. The year-to-date amount on acquisitions includes an outlay of $159 million in the second quarter. This reflects the acquisitions completed by the end of February, as listed on the right side of the slide.

Subsequent to the quarter end we also completed the previously announced acquisition of the largest recycler in British Columbia.

Our capital program is split almost equally between maintaining the business and our projects for growth. The year-to-date amount of CapEx includes amounts spent in the second quarter of $21 million. During the remainder of our fiscal year we expect to spend between $50 million and $80 million on a combination of maintaining the business and group capital projects.

Moving to slide 20, this shows the effect of our second-quarter activities on our capital structure. Due to strong business performance, operating cash flow in the second quarter was positive $38 million. Year-to-date operating cash flow is also positive at $20 million. Reflecting multiple acquisitions and our capital projects, we ended the second quarter with net debt of $273 million and leverage of 21%.

During the quarter we closed our new credit facility, which expanded our total debt capacity to $650 million. This includes a $30 million Canadian facility, which supports the operations of our recent investments in Western Canada. The new five-year facility matures in February 2016 and provides us with additional flexibility for future growth.

Now I'll turn the call back over to Tamara, who will provide our third-quarter outlook and some concluding remarks.

So now let's take a look at our outlook. As we are all aware, world events make it difficult to project near-term expectations. We showed during our second quarter that we navigated well through the events that changed the governing landscape in Egypt.

In the near-term we see markets staying cautious but remaining stable, and in the medium- and longer-term we see markets becoming stronger, moving towards robustness as rebuilding occurs in Japan, infrastructure buildout resumes at strong pace in the Middle East, and economic activity continues to improve globally. So our outlook for the third quarter assumes that market stability is maintained.

In our Metals Recycling Business we expect that ferrous volumes will increase by 10% to 20% from the second quarter, due to normal seasonal improvements in supply flows. Nonferrous volumes are also expected to increase 10 to 15% from second-quarter levels, due to increased production and enhanced contributions from processing technologies.

Both ferrous and nonferrous sales volumes are expected to be positively impacted by the contribution from the recently completed acquisitions.

Both ferrous and nonferrous net selling prices are expected to approximate second-quarter averages. And finally, we expect our operating income from ferrous tons to be slightly lower than the second quarter of fiscal 2011. The net result of this outlook is that we expect another strong quarter for MRB.

Turning to slide 22, in our Auto Parts Business we expect revenues to increase 10% to 15% from the second quarter of 2011 due to normal seasonal improvement in emissions and parts sales and the full-quarter impact of new stores. We expect to sustain the strong operating margins achieved in the second quarter.

Finally, in our Steel Manufacturing Business sales volumes are expected to improve slightly from the second quarter due to seasonal increases in construction activity. Average net sales prices are expected to increase from the second quarter as domestic demand continues to improve, albeit still slowly. And as a result, operating margins are expected to improve slightly as compared to the second quarter.

So, to conclude, let's turn to slide 23. The considerable momentum created in the first half of our fiscal 2011 should continue to benefit us during the second half of the year and beyond. A few key strategies have enabled us to strike the right balance for long-term profitable growth.

First, we are continuing to deliver strong financial performance. Second, we are executing on our acquisition strategy, expanding our operations and leveraging our scale. Lastly, third, we are investing CapEx focused on improving our operating efficiencies and production yields, enabling us to increase revenues and expand margins.

Today we are well-positioned strategically, operationally and financially to take advantage of the strong positive long-term dynamics we see in our markets.

Now, of course, none of this would be possible without the hard work and commitment to excellence of our employees. Our thanks go to everyone at Schnitzer for delivering superior operating performance, while implementing major equipment upgrades, executing and integrating multiple acquisitions and, most importantly, completing the first half of our fiscal year with 85% -- 85% -- of our facilities reporting no lost time accidents. Congratulations to each of you.

As we look at the strong positive trends in our markets going forward and our investments that are just beginning to demonstrate their value, we are very optimistic about our future. While there are a number of potential market disruptions on the horizon, we continue to be focused on the things we can control, and those are -- operating safely and efficiently and investing our capital wisely.

Now we will open up the call for a few questions.

(Operator instructions). Eric Glover, Canaccord Genuity.

I was wondering if you could tell us what you're hearing from your customers in Asia about the disaster in Japan and what they think the impact will be to the steel and scrap markets?

Let me take it from a slightly different perspective and give you a sense of where Japan is in terms of our platform, and then give you a sense of what we are seeing in terms of flows.

As you know, Japan is not a major customer. They export very little scrap. And I think you were the one that actually used the term they are a closed loop in terms of their production of scrap and their use of scrap.

And so the tragic disaster that happened to them has a couple of alternatives in terms of its outcomes. And what we are seeing and hearing is really the following. Blast furnaces produce about 80% of their steel production, and they have been operating pre the disaster at about 90% or so utilization, and EAF produced about 20%, and we have been hearing pre the disaster operating at between 50% and 70%.

So, to the extent that new steel production or new steel utilization is required, it is the EAF that could probably lift Japan's need for new steel. So that will increase, obviously, their demand for scrap. And whether that scrap comes from excess scrap that may have been generated as a result of the earthquake and the tsunami or additional imports it is not clear at this time. I am not sure that anybody can really opine as to that.

And if due to power shortages or just production availability, if Japan has to import more steel, it could be beneficial to scrap prices because the steel mills elsewhere in the world -- Asia, US, Europe -- would have to ramp up reduction. So that's the current take at this point in terms of what we are seeing.

Switching gears, in terms of SG&A for the third quarter, should we be thinking in terms of the percentage of revenue that it would be similar to what we saw in the second quarter or somewhat higher, given the impact from acquisitions?

Well, in the second quarter we saw $44 million of SG&A, and year to date we're at $89 million. I think we will see a small uptick in SGA, simply because we have increased the size of our employee base and our business as a consequence of the acquisitions.

One way to look at that is to look at the proportion of our SGA on each of our businesses. For example, in fiscal 2010 MRB was around half of our total SGA for the year. Then what you should do is look at the proportional increase of MRB's volumes relative to the total volumes coming from the acquisition, and that should give you a good estimate of the potential increase in the run rate of their SGA. Does that help?

Yes, it does. And then, Tamara, just one final question, getting back to what you were talking about with Japan, it would seem to me that there is currently a lot of fears about contamination of the scrap that has been generated in Japan. And that would suggest that if they needed more scrap to fuel the EAF, it would come from outside Japan, which I would think could actually benefit Schnitzer and other exporters. Can you comment on that?

Well, it's difficult to really speculate on the radiation issues regarding scrap flows. We are seeing here probably some of the same things that you are hearing, but we're also hearing that scrap flows are resuming normal flows in the parts of the country that weren't affected by the earthquake and the tsunami.

But clearly, if there is a need by Japan for more scrap than what they normally import, and if their exports reduce significantly, then that's clearly going to put more demand on lower supplies, and that typically means higher prices.

Thank you.

Luke Folta, Longbow Research.

A couple questions -- firstly, are you able to say or disclose that there were any inventory holding gains in the quarter in MRB?

As you know, we don't speculate on inventory, so we don't hold inventory. And what we can say is during the second quarter, because prices have begun to run off toward the end of the first quarter and then through the first half of the second quarter, our second-quarter did have a bit of a benefit from lagging average inventory costs as they [go up] to increases in purchase prices. So that catch-up had happened by the end of the quarter.

So are you able to say what that net benefit was for the quarter?

No. And the reason is that would be a non-GAAP measure, and we are not permitted to disclose it.

For the outlook in that business you had said that you expect a slight decline in profitability -- or in margins, rather. I assume that's a couple bucks a ton. And when I think through that, I'm thinking if you don't have the inventory benefit in the third quarter, I'm looking for -- I would have actually thought the decline might have been bigger than you are expecting. So I was hoping you could maybe talk about what positive factors are helping to support the margins at this level, because it may be ranked in order of importance. Is it the more nonferrous volumes that you will be selling? Is it improved scrap flows? Can you give us some sense of what is happening there?

Yes, yes, I can. I think, firstly, we have given some fairly specific guidance in our press release with regards to outlook, but I can comment on MRB as a whole. We are expecting another strong quarter, and some of the positives I would point to in our outlook are average selling prices similar to the second quarter, ferrous and nonferrous volumes substantially up, in-line with the ranges we have given.

However, we have noted our margins will be slightly lower. And although underlying performance in the third quarter will be strong, our second-quarter did include a net customer contract settlement which, while very positive for the Company, it will not be a recurring item.

And then, as you think about your leverage and spending, it looks like right now debt to cap levels are sort of at the higher end of the range, where they have been historically. That said, you have enhanced your liquidity with your revolver expansion. Is it fair to say that you're probably through most of the CapEx and acquisitions that you're going to do for the year, or would you be willing to take that higher?

Well, I'll comment on that. Net debt -- well, starting the net debt at the end of the second quarter, as we said, was $273 million, representing 21% leverage. At the end of the third quarter it actually could be higher because, as we noted, we completed the previously announced acquisition of the largest BC scrap recycler after the second quarter.

The actual level of debt at the end of the third quarter will really be dependent on our operating cash flows, to the extent that may bite into debt, and also net of our CapEx expenditure in the third quarter as well.

To give one other comment here, Luke, one thing about our Company, as you will have noticed from the presentation, is that we have averaged strong operating cash flows over the last several years of around $175 million a year. So we anticipate strong operating cash flows going forward, including from our newly acquired businesses. So we expect that we will continue to invest in this business, although the rate of investment obviously will be dependent on the amount of cash flow that we are producing.

If I could ask one more quick one. Just what is your expectations for interest expense now for the remaining quarters of the current year? And thanks a lot, guys.

I'll take that one as well. One first initial comment here, in fiscal 2010 our interest expense was just over $2 million for the year as a whole. So interest has not historically been a significant impact on our earnings per share. You're correct to point out that, with the higher debt, we would expect some higher interest.

I wouldn't like to put a number on it because we don't actually forecast our net debt levels going forward. However, what I would say is it is unlikely to be a significant drag on our results for the year.

Torin Eastburn, CJS Securities.

Just a quick follow up on the margin question. Your guidance in MRB for Q3 is down sequentially and year-over-year. It seems like that is just an anomaly that you're going up against to abnormally strong quarters. Do you think that's the case? Is there anything unfavorable going on in MRB from the margin perspective?

One thing -- you mentioned Q3 of last year, and in the third quarter of last year we had operating profit per ton of $43. And that was followed by a fourth quarter of $19 per ton.

We had an average inventory effect benefiting Q3 and adversely impacting Q4. So at that time we advised both quarters need to be looked at on average, and the average was just over $30 for the two quarters. And I think that needs to be borne in mind when thinking about our coming third quarter relative to our outlook.

I would also say that our result in the second quarter of $38 was almost double what we have achieved in the first quarter. So it was an extremely strong quarter, so our comments regarding slightly below in terms of expectations in the third quarter should be taken in that context.

And Richard, try to be understanding here, meaning it should be taken as very strong performance in Q3. It's that British part of Richard that is going for the understatement.

But let me also direct your attention to that slide -- I think it was slide 11, where we give you a look at our last four quarters. And, Torin, you will know in the past we have talked about midcycle margins being around $38. And if you look at our last four quarters, we're averaging about $30, so we are trending back toward on a very steady pace, back toward midcycle margins.

However, what is really important to note is the US is nowhere near back to midcycle performance. And yet, if you take a look at this slide, and if you go back to our Qs and Ks in the past, if you look at APB's and MRB's operating income for the last four quarters and you compare it to APB's and MRB's operating income in 2006 and what they did in 2007, you will see that the last four quarters exceeds what they did in 2006 and what they did in 2007.

So we are feeling quite positive and quite good about the fact that our strategy to enlarge our -- increase our revenues and enlarge our margins, based on investments in CapEx, based on acquisitions, they have done continuous improvement -- has been delivering results.

I don't disagree; I was just curious. Facilities that you have purchased, you have invested a lot improving your nonferrous capture in your facilities. The facilities that you purchased recently, what kind of margin opportunities do you think you have there?

Well, as we noted, Torin, we spent $166 million in the first two quarters of the year. We expect that in time these acquisitions will be accretive to historic trading multiples. I think we had said previously that we thought in terms of the acquisitions, including the one we closed after the second quarter end, about 550,000 annual ferrous tons, and about 60 million annual nonferrous pounds. And 40% of the ferrous was incremental and all of the nonferrous was incremental.

So we believe that we will be capturing profits not just from all the additional tons that we've purchased are incremental, but also through cutting -- getting out, getting nearer to the source on the tons that we were previously getting from these acquired businesses.

And then, finally, from a series of operating synergies, including infrastructure, working practice, selling and buying, etc. But only one, and we will likely have a nonferrous third stream system.

Chris Olin, Cleveland Research.

I wanted to just go over a big picture idea on domestic scrap prices and maybe try to figure out what I'm missing here. If you look at the demand drivers, you've got a seasonal aspect coming back to the marketplace. It appears to me that construction is starting to come back, which should theoretically drive the mini-mill operating rates higher, especially on the long product side. And then export seemed to be holding steady.

Now I'm wondering why the pricing outlook through the second quarter is a little more positive. Has the supply dynamic changed much, or am I just thinking too positive in terms of the incremental volume on the demand side next quarter?

You are talking about the domestic market?

Yes.

Well, the domestic market for March was up pretty significantly for prime and flat for other products. And they are just in the middle of it right now in April, with I think, if you read the public reports people are saying in the various trade journals and the like that April will probably be similar, i.e., up for prime and steady for the other products.

And those are still very high levels. I mean, we are talking about mid-to high 400's on delivered basis. And mid 400's on a delivered basis is very strong prices. So, while you might be seeing -- or you might have expected some continued pressure up on prices, the only reason why there might be a little bit less of that against, as I said, what are just fundamentally strong prices is there have been a lot stronger supply flows, and the domestic market looks quite closely at the export market. And the Mediterranean market is steady, but showing some hesitancy or cautiousness because of the supply chain disruption from Japan and the Mideast unrest that has gone on in parts of that world.

So again, we are seeing very steady demand, very stable and historically high prices, so I wouldn't -- again, I would take away a positive from that as opposed to a negative.

No, I understand. Just in terms of the two factors, is the supply coming on or maybe the apprehension about the Middle East, which one of those would be more important right now in terms of preventing prices from moving higher?

Well, I don't know that I could weight them, to be perfect -- it's probably a question that asks for more precision than exists in the marketplace..

Is there a region generating more supply of scrap in the United States versus any of the other ones?

Well, I think the supply -- the supply flows have increased in the US for a couple of reasons. Higher prices typically bring out more flows. But also US domestic consumption is up, jobs report is up, steel production is up. So all of those -- and then you have got the seasonal benefit that we are experiencing right now, so all of those are driving higher supply.

That was helpful. Thanks a lot.

[Karen Cutal], D.A. Davidson.

Hi, this is Karen filling in for Brent Thielman. My questions have been answered. Thank you so much, and congrats on a good quarter.

Evan Kurtz, Morgan Stanley.

Just maybe a quick follow up on that last question. Reading the trade press, it sounds like there haven't been any meaningful cargoes into Turkey in quite some time. I understand there's some supply issues there, but what would you say the potential is for some sort of restocking in that area at some point soon?

Well, Turkey is in and out of the market. So that's their usual buying pattern, and we really haven't seen any change to that.

And then just a second question on nonferrous separation projects. Could you give us a sense -- what are the IRRs on some of these projects?

Well, that's not something that we generally discuss. I think from our point of view we would not be making these investments unless we expected returns significantly in excess of our cost of capital. You probably have to make your own estimate of what you believe that is.

We have said that an over annual CapEx in fiscal 2011, which we are projecting in total to be in the range of $100 million to $130 million, that around half of that is on a growth CapEx. So in the first full year of operation -- and we are not there yet, but in a first full year of operations we would expect returns to be exceeding our cost of capital.

We are currently in the rollout period. And as you have heard Tamara say, implementation is very much on track with three of our four export facilities having implemented and the fourth one closed. So we will begin to see over the next couple quarters a build-up to fuller production levels and more benefits come through.

We already saw a little bit of that in Q2 of our higher nonferrous volumes. And there's also a smaller contribution to a higher operating income per ton, and you should see that build-up.

Have you ever disclosed any sort of figures on CapEx per incremental ton of nonferrous process or pounds of nonferrous processed?

No, no; our metals recycling and segment we have disclosed ferrous and nonferrous together as a composite metal recycling figure.

Tim Hayes, Devonport & Company.

One question -- you mentioned the benefit from the settlement of a customer contract in the quarter for recycling business. Can you quantify how much that was?

Yes. I think, firstly, it was really an excellent outcome for Schnitzer. The origin of that settlement was back in the end of calendar 2008 when we had a small number of cancellations. So we were very pleased to settle that dispute with the customer and get this excellent outcome.

In terms of the benefit of the quarter, it was actually a net benefit because we had some transaction costs related to our new acquisitions. So in the round, it was about $4 of our metals recycling operating profit per ton.

And that customer -- is that listed in the legal section of the filings, if we dug into that, or not?

We don't, Tim, talk about the specific customer involved, but we do mention the issue as it did impact the quarter.

Very good. Thank you.

Luke Folta, Longbow Research.

I just got one of my follow-ups answered. I've got one last one for you. As far as the Auto Parts Business is that the number of units that you had operating in the quarter -- just for modeling purposes I always like to look at revenue per location -- what number should I use? I know you had 50 at the end of the quarter. What do you think the quarterly average was?

Well, you can look at the change in the quarter, I think. And the mean change was our acquisition of the Pacific Northwest units, which happened midway through the quarter. So I would just take the number of units at the start of the quarter and the number of the end, and take the average of the two.

Thanks a lot, guys, and good quarter.

And at this time I'm showing no additional questioners in the queue. I would like to turn the program back over to Ms. Lundgren for any closing remarks.

Thank you, and thank you for joining the call today. For those of you who are basketball fans, enjoy the game tonight. And we look forward to speaking with you in the summer on our third-quarter call.

Thank you. Ladies and gentlemen, this does conclude today's program. Thank you for your participation, and have a wonderful day. Attendees, you may now disconnect.